What now for final salary pensions?

A new report from the Pension and Lifetime Savings Association suggests that as many as three million savers have only a fifty/fifty chance of receiving the pension pot they are expecting from their final salary pension scheme. This comes on top of news last week that British Airways intends to close its final salary pension scheme and is another nail in the coffin for defined benefit pensions. The BA scheme has a deficit of just under £4bn and the airline reckons that it would cost too much to keep the scheme up and running. The scheme closure will come as a blow to the 17,000 members but BA reckon it is necessary to prevent their future contribution levels spiralling out of control and to protect the benefits of existing scheme members.

And of course this news from BA is on top of already damaging stories from other large final salary schemes such as BHS, and a continuing worry that many schemes continue to be underfunded and will have difficulty meeting its obligations to members.

This news leaves many members schemes unsure what to do with the benefits they have already built up. The generally received wisdom with these pensions is to leave them where they are unless there is a compelling reason to move to a personal pension.

It’s usually a debate about guarantees over flexibility.

Final salary schemes offer a guaranteed income that generally increases with inflation from the date of retirement while personal pensions allow members to take cash out of their funds whenever they like, although much of the money they take will be subject to tax, often at a higher rate than they are used to paying.

It can seem very attractive to move benefits from a final salary scheme because of this flexibility but careful calculations should be looked at before making any decisions. In fact legislation won’t allow you to transfer benefits where the transfer value is more than £30,000 unless you can show the scheme administrators that you have taken financial advice beforehand.

Some final salary schemes now look as though they are trying to ‘tempt’ members to leave by offering transfer values that seem hugely inflated. The schemes see this as beneficial to them since it means that they don’t have an increasing liability to pay a guaranteed income for an unknown period of time, and members find it attractive because it can often be a very big number, sometimes in the hundreds of thousands of pounds. But as always, make sure you look closely at the numbers before making a final decision.

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